The Anatomy of A Twinkie

It seems rather curious that Hostess Brands CEO Gregory Rayburn would have so much time to talk to the business press over the last week or so as his company was racing toward liquidation, but he did and the message was consistent. The unwillingness of the baker’s union to take some 30% in compensation reductions was the cause of the demise of the Twinkie.

Don’t get me wrong, unions in general and the bakers at Twinkie in particular are a useless relic of the past. Paying people $48,000 a year, along with a solid health plan and retirement benefits takes a lot of productivity to justify and unions are productivity killers. Regardless, the union didn’t kill Hostess. That much is clear from a basic look at their business.

They are a private company so their financials aren’t out there in the open, but looking over the numbers from the last few years when they were publicly traded, as well as the figures from their bankruptcy filings, the cost structure look something like this:

Now 15% for factory labor is on the high side for any product, especially bakery products, but when better than half the cost of a Twinkie has nothing to do with the value of a Twinkie it is pretty plain that Hostess’ inability to make a profit has everything to do with management – or, more appropriately, mismanagement. It was something of an understatement when Food Industry expert David Pauker said, Hostess’ brand name and recipes will “most likely will be purchased by a competitor that will bolt the additional sales to a more efficient delivery system.” My guess is that pretty well describes just about everyone in their industry. Throw in the costs and profits of the grocery and convenience stores and, at best, 25 cents out of every dollar spent on Twinkies actually went into making the Twinkie – the rest went for something else.

Even the value adding chunk of the Hostess cost structure is overblown. Unprocessed sugar goes for about 19 cents a pound on the global market these days, but thanks to sugar tariffs that have been on the books since the Depression US companies pay nearly double that. At 19 grams of sugar per Twinkie X a half a billion Twinkies a year, Twinkie eaters have been paying better than $4 million a year just to prop up US sugar growers … add in the sugar it takes to make Ho Ho’s, Ding Dongs, snack cakes and the rest of the Hostess line-up and you are talking real money.

The liquidation of Hostess was written in the stars long before last week. Gergory Rayburn does thai sort of thing for a living. You can read some of his career highlights here, but the one thing glaringly missing from his resume is actually running anything profitably. He is a ‘restructuring expert’, which basically means he doesn’t worry about running the business – just getting whatever he can out of it for the stockholders, regardless of where that leaves employees, customers, suppliers and much of anyone else connected with the business.

The details of the script for Hostess end were left up to him, but ending it was decided upon when he was brought in eight months ago. What we saw last week was little more than a clumsily executed stage play to blame the unions for a decade of mismanagement.

Everyone is predicting that Twinkies will live on, provided by someone else. I hope so. With such powerful forces aligned against me in my campaign to defend the American tradition of obesity I need all the Hostess products I can get, but Twinkies will only survive in the hands of someone who can make them with a much better value proposition. And make no mistake, like so many other ‘brands’ Hostess died of a pathetic value adding ratio, and that is 100% on the management of the company.

Comments

What percentage of the Admin & Other is compliance with government regulations? No doubt the place could have been better managed but I believe a good chunk of the admin cost was somehting they really could not control. Labor costs are something they could cut so cut they tried…

Jeff, no dobt government regulations hurt, but I can’t be too sympathetic when I know of a few lean food companies who are able to have 60-65% of their total spend go to the product, compared to the paltry 43% at Hostess.

Well said. And that’s apart from the substantial raises senior managers gave themselves just as the ship was going down.

This seems to be pretty standard these days with the adherents to the Bain Capital free enterprise model:
1. Load a company up with debt,
2. Take big pay and bonuses for top execs,
3. Blame the workers when the whole enterprise goes under.

You got this one dead on no food industry compoany can survive their cost structure. It is far to easy for any competitor to knock off any product you make if you do not hold a tight line on costs. The same union represents workers at most of their competitions facilities without any of them currently demanding pay cuts. Unfortunately the Hostess company was never well managed and sold of many of its opportunities to turn extra profits else where. They also totally ignored the shift toward healthier eating habits, something many of their competitors didn’t miss.

But in the food and for that matter most agricultural product processing whenever your non product costs start representing more than 45% of total costs you should know you’re in big trouble.

Surprise the companies that Hostess sold their brands to in Canada are actually doing really well, but than they aren’t blowing 50% of the money in useless overhead.

As to blaming government regulation for their problems, it doesn’t work. One thing the various North American government agencies have been really good at is helping businesses streamline and improve safety compliance. And those costs are pretty much identical for all players and thus aren’t a disadvantage to anyone. Anyway they all endup in production costs or R&D not in overhead.

“With such powerful forces aligned against me in my campaign to defend the American tradition of obesity I need all the Hostess products I can get…” I am still laughing. This has made my day. Thanks for the entertaining article.

I read an article today about the union work rules… one union guy to load bread and another separate union guy to load pastries… crazy stuff. But, great analysis to show labor was only 15% of total cost…

There seems to be a natural human tendency to externalize the root cause of problems. Many managers are Insecure that any real analysis of root cause might create a negative perception of their competence. Why not pick something that I can claim is “outside my control,” like unions, or regulations, or IT, or the labor market, or the economy. Lean Managers practice “hansei”, relentless reflection, so that kaizen can effectively be applied to the real problems within the organization. They actually enjoy being wrong at least 50% of the time. If your goal is to truly turnaround an organization, then you will need Lean Managers. If your goal is to extract as much capital from it for top management, before it is completely liquidated then hire somebody like Rayburn.

I heartily agree. I’m from near Chicago and I have always thought Chicago and Philly are two places driven by a common culture. Whether it is Chicago’s deep dish pizza or Philly’s cheesesteaks the people in those cities are hard working folks who know that getting the job done through a tough northern winter is no task for skinny people.